AUD/USD hits five-month high as Fed softens stance
The Australian dollar (AUD) finished higher last week at 0.6396 (0.33%), locking in a third week of gains and its highest weekly close in five months.
AUD/USD’s gains were driven by improved risk sentiment and as investor anxiety over President Trump’s tariffs and the Federal Reserve’s (Fed) independence softened.
Fed signals potential for policy pivot
A more dovish stance from the Fed also supported the improvement in risk sentiment and the rally in AUD/USD after Fed Governor Christopher Waller suggested that the United States (US) central bank might consider lowering interest rates if the economy weakens significantly. His remarks came a week after Fed Chair Jerome Powell sounded hesitant to cut rates.
Equity market volatility has also provided a tailwind for the AUD as international investors move away from momentum/high beta equity indices into low-volatility defensive indices like the Australia 200.
This trend also encompasses the broad shift currently underway out of US equity markets, due to loss of confidence in the White House and the prospect of lower US growth and higher inflation from President Trump’s trade and immigration policies.
Economic data to influence AUD movements
Whether AUD/USD can continue its upward trajectory for a fourth consecutive week will largely depend on offshore developments related to tariffs and trade agreements.
- First quarter (Q1) 2025 Australian inflation report on Wednesday, 30 April, which is previewed below, will also play a role in shaping movements
- Australian Federal Election on Saturday, 3 May, which betting markets assign an 80% chance of the Australian Labor Party (ALP) forming government, is not expected to be a market mover.
Labour force report preview
Date: Wednesday, 30 April at 11.30am AEDT
Fourth quarter (Q4) 2024 headline inflation rose by 0.2% (consensus was +0.5%), allowing the annual rate to ease to 2.4% year-over-year (YoY) from 2.8% prior. It was the lowest annual inflation rate since the June 2020 quarter, when the consumer price index (CPI) fell during the Covid-19 pandemic and when childcare was free.
The Reserve Bank of Australia’s (RBA) preferred measure of inflation, the trimmed mean, rose by 0.5% in the quarter (consensus was +0.6%), allowing the annual rate to fall to 3.2% from 3.6% prior, for an eighth quarter of lower annual trimmed mean inflation.
The preliminary expectation for Q1 2025 is for headline inflation to rise by 0.7% quarter-on-quarter (QoQ) for an annual rate of 2.3%. The trimmed mean is expected to rise by 0.6% QoQ, which would see the annual rate ease to 2.8% from 3.2% in Q4. This will mark the first time year-ended inflation will be within the RBA’s 2 – 3% target band since Q4 2021.
Given the downside risks to global growth and softer near-term inflation profile, we expect the RBA to cut rates by 25 basis points (bp) at its meetings in May and July. The rates market starts the week fully priced for a 25 bp rate cut in May, with a cumulative 118 bp of RBA rate cuts between now and year-end.
